AUD and PHP Grapple with Global Banking Strains and Inflation Headwinds

The Philippine Central Bank is closely monitoring the peso for potential spillover effects on inflation amid recent global banking stresses, as the currency slid to more than four-month lows. The AUD-PHP rate, which indicates how many Philippine Pesos can be bought for 1 Australian dollar, stood at 37.58 PHP as of April 18, 2023. Both the AUD and PHP are expected to underperform against the USD in the near term as investors turn bearish on Asian currencies due to the likelihood of the US Federal Reserve continuing to hike rates.

The Australian dollar's trajectory has been largely influenced by the Reserve Bank of Australia's efforts to tackle inflation through raising the cash rate. However, the AUD has underperformed against most G-10 currencies in 2023 as the RBA has slowed the pace of its rate hikes compared to other central banks, raising the differential in interest rates. The RBA raised interest rates by a total of 3.5% before pausing to assess the impact, whereas the US Federal Reserve has lifted rates by 4.75%.

According to Ashish Agrawal, Head of FX and Emerging Markets Macro Strategy Research for Asia at Barclays, the AUD is likely to consolidate against the USD in the short term before witnessing measured gains in the second half. He attributes short-term headwinds to the RBA's cautious approach and rising global growth risks.

As for the Philippine Peso, interest rates and inflation have been key factors in its performance. The PHP has been among the best performing currencies in Asia this year, up nearly 0.5% against the USD. This can be attributed to the Bangko Sentral ng Pilipinas' (BSP) willingness to continue its monetary tightening. The BSP has raised its benchmark rate by 4.25% since May 2022, responding to soaring inflation that peaked at a 14-year high of 8.6% in February 2023. However, headline consumer prices have since slowed to 7.6% in March, raising the possibility of the central bank pausing its rate hikes if the trend continues.

In the coming months, the Philippines' widening trade deficit is expected to become a significant factor determining the PHP's performance, particularly in light of a slowing global economy. The currency is already under pressure due to USD outflows following a sharp drop in exports.

Both the AUD and PHP are expected to experience some volatility over the next few months as central banks in both countries near the end of their monetary tightening policies to rein in inflation. Forex traders, however, anticipate that the AUD-PHP pair will continue trading within a narrow range this year.

Australia's trade relationship with the Philippines has grown rapidly in recent years, with more than 250 major Australian companies now operating in the Southeast Asian nation. Furthermore, the Philippines remains a popular tourism destination for Australians, who rank third among foreign tourist arrivals in the country.

Despite the AUD's slight dip against the PHP over the last few months, the conversion rate has remained fairly stable for over two years, with one dollar fetching between 36 and 39 pesos. This stability follows a brief but significant dip to 29.49 PHP in March 2020 at the onset of the coronavirus pandemic.